Lewis Two-Sector Model Assumptions

The Lewis two-sector model describes economic development through the transfer of labor from a traditional agricultural (rural) sector to a growing industrial (urban) sector.

Key Model Assumptions

Central to the Lewis model are specific assumptions about the labor markets in both sectors:

• Dual Economy: The economy is divided into a subsistence agricultural sector and a capital-producing industrial sector.
• Rural Sector Condition: There exists surplus labor in the rural sector. This implies that the marginal productivity of labor in agriculture is zero or very low, meaning labor can be withdrawn without reducing total agricultural output.
• Urban Sector Wages: The industrial sector offers a fixed wage, typically slightly higher than the average rural subsistence wage, to attract workers.
• Labor Transfer: As the urban industrial sector expands (driven by capital accumulation), it draws this surplus labor from the rural areas.

Analysis of Options

Considering the assumptions of the Lewis model:

• Option 1 is incorrect: High urban unemployment isn't a core assumption; the model assumes the urban sector absorbs labor.
• Option 2 is incorrect: The model assumes constant or slowly rising urban wages initially, not rapidly rising ones, to encourage labor migration.
• Option 3 is incorrect: This contradicts the fundamental assumption of low or zero marginal productivity in the rural sector due to labor surplus.
• Option 4 is correct: The presence of surplus labour in the rural sector is a foundational assumption enabling the labor transfer mechanism central to the model.